ICN’s chronic underperformance persuaded shareholders they should toss Panic out; after several attempts, they finally succeeded in 2002. “Nutty is probably the right word” to describe the Panic era, says Mason Morfit, a Valeant director whose firm, ValueAct Capital, owns 5.5% of Valeant stock. “It was frightening and entertaining at the same time.”
(Panic, now in his early 80s, is still in the business, heading a biomedical operation he bought from ICN in 2003; he has a young son with his latest wife, an opera singer nearly 40 years his junior.)
With Panic gone, successor Robert O’Leary dismantled much of the company and renamed it Valeant. It focused on developing neurology drugs and branded generics, a strategy that continued after O’Leary, in ailing health, handed the reins to one of his recruits, Tim Tyson, in January, 2005 (O’Leary died less than two years later).
But in the post-Panic regime, Valeant still lost money for five years straight. When Morfit joined the board in 2007, “it was my first peek under the covers as to how much progress we were making,” he says. “It was evident we were not on the right track. In fact, we were going the opposite way.”
As Valeant was struggling to redefine itself, Biovail was heading into its own crisis. Entrepreneur Eugene Melnyk had turned the fledgling company into a success by applying its patented time-release technology to create once-daily formulations of popular drugs that previously had to be taken multiple times a day. Biovail’s first hit was Tiazac, an angina treatment approved by the FDA in 1995. It helped make Melnyk a jet-setting billionaire, with racehorses and a spread in Barbados.
But Biovail had many detractors who were suspicious of its accounting and financial performance. A litigious Melnyk battled back, but a traffic accident near Chicago in October, 2003, changed everything. Eight people were killed, and one truckload of Wellbutrin XL pills, Biovail’s new one-a-day version of an established antidepressant, was damaged. Melnyk and Biovail claimed that $10 million to $20 million worth of pills were involved, affecting quarterly earnings. Shareholders and regulators suspected he was using the tragedy as cover for Biovail’s shortcomings. The following year, Biovail admitted that just $5 million worth of pills were lost, plunging the company into years of regulatory investigations and shareholder lawsuits. By the time the smoke had cleared, Melnyk was gone and Biovail was out more than $200 million in legal expenses, settlement costs and penalties, net of insurance.
Melnyk fought back against his former company in two largely unsuccessful proxy battles, then sold most of his stake. Biovail moved on. New CEO Bill Wells slashed the dividend and refashioned Biovail as a conventional pharmaceutical firm, developing drugs to treat disorders of the central nervous system. But it was something else Biovail had that would soon lead to a marriage between the houses of Panic and Melnyk.
In 2002, Panic’s successor, Robert O’Leary, put in a call to Robert Ingram, a former CEO of pharmaceutical giant Glaxo Wellcome (now GlaxoSmithKline). O’Leary wanted advice: Who should he hire to be his right-hand man to fix ICN? “I said to him...‘You’ve got a shitty company,’” Ingram recalls. Nevertheless, Ingram recommended a former Glaxo executive, Tim Tyson, who joined ICN in October, 2002.
Before long, Tyson and O’Leary wanted Ingram’s help again—as a board member. Ingram was reluctant to join but felt he couldn’t let them down. Ingram eventually became chairman of ICN/Valeant.
In 2007, the board felt it was time to call in another outsider to fix Valeant. Ingram again had someone in mind: Mike Pearson, head of the global pharmaceutical practice at consultants McKinsey & Co. He’d hired Pearson for several projects at Glaxo and had been consistently impressed by his insight and his drive to deliver results. Most of all, he appreciated Pearson’s “brutal” honesty. “When you’re CEO, people want to tell you good news,” Ingram says. “Mike would come in and tell me things that other people were reluctant to tell me.”
Pearson, a native of London, Ontario, was at the peak of his consulting career. He’d come from a lower-middle-class background—his father was a phone installer—and the family had to make financial sacrifices to send Pearson to prestigious Duke University. Pearson excelled, playing on the hockey team, earning math and engineering degrees and gaining entry into the elite academic Phi Beta Kappa Society. After earning an MBA on full scholarship from the University of Virginia, he joined McKinsey, working his way up the ranks to become a board member and one of its top-paid professionals.